Investment Highlights

• We maintain our UNDERWEIGHT call on Nestle (Malaysia) with an unchanged fair value (FV) of RM115.00/share, based on a DCF valuation with an unchanged WACC of 4.7% and terminal growth rate of 2.0%. There is no adjustment to our FV for ESG based on our 3-star rating. We believe that Nestle would be affected by rising raw materials and Covid-19- related expenses as well as lacklustre demand.
   
• Here Are Some Key Takeaways From Nestle’s Results Briefing Held Yesterday:

1. Rising raw material costs will exert downward pressure on profitability margins in the coming quarters. Nestle’s main priority is to hedge or reduce exposure to rising palm oil, grain and sugar costs, instead of passing on the costs in the form of higher selling prices.
   
   We expect raw material costs to soften next year, pushing GP margins back to normal levels. Good weather conditions and the easing of workforce restrictions are expected to improve supply-demand dynamics of raw materials such as soybean.
    
2. Capex plans announced in the last quarter will be delayed for now due to pandemic related restrictions. The bulk of the RM300mil allocation will be used for the capacity expansion of the Batu Tiga factory, which produces Maggi products. Aside from that, the group will expand on digitalising its processes and the development of its plant-based meals solution.
    
3. Nestle has seen improvements in domestic and export markets as reflected in the 7.7% YoY growth in domestic revenue and 1.8% YoY increase in export revenue in 1HFY21. While freight costs are still high, we believe that the group is partlially shielded from the impact as most of its exports are regional.
    
4. Online contribution remains strong, as a nationwide lockdown has prompted customers to make their purchases online via third-party merchant sites. On a negative note, MCO 3.0 has impeded the promotion of new SKUs and as such, we expect a muted quarter in terms of product launches. Poor customer footfall at physical retail outlets and restrictions on in-store sampling also complicate Nestle’s promotional efforts.

Source: AmInvest Research - 26 Aug 2021